On intermittent renewable generation & the stability of Australia's National Electricity Market

Abstract:
Energy-only markets have an inherently unstable equilibrium, even under ideal conditions, because participants are unable to optimise VoLL events. The addition of intermittent renewable generation is thought to make conditions harder. In this article, optimal VoLL events in an islanded NEM region is modelled by substituting high price caps for Boiteux capacity charges, then analysing the impact of adding progressively more Variable Renewable Energy (VRE) – up to 35% market share. Spot market conditions prove stable and tractable provided thermal plant exit and adjust perfectly. But VRE asset allocation is important; absent highly elastic demand or ultra-low cost storage, solar PV market share has economic limits because the technology rapidly cannibalises itself. Furthermore, as VRE rises in imperfectly interconnected regions, a tipping point appears to exist where hedge markets enter an unstable zone through shortages of ‘asset-backed’ firm intra-regional swaps and caps. Government-initiated CfDs for VRE need to be designed carefully to ensure any instability is not exacerbated by extracting contracts from an already shortening hedge market.